Too Little but Not Yet Too Late: Economic Policies to Tackle Climate Change
November saw the United Nations’ 26th climate change Conference of the Parties (COP26) take place in Glasgow, Scotland. The results were mixed for humanity’s future. There were some important commitments, such as reductions in methane emissions and deforestation as well as the US and China’s joint declaration on enhancing climate action, but ultimately they are not enough to prevent global warming from exceeding 1.5 degrees Celsius above pre-industrial levels, the point below which scientists say the world must stay to avoid the worst case climate scenario. Staying below 1.5°C requires, in part, a massive drop off in global carbon emissions (about 45 percent from 2010 levels) by 2030, reaching net-zero by mid-century (Summary for Policymakers of IPCC Special Report on Global Warming of 1.5°C Approved by Governments, 2018). All is not lost yet, but pressure needs to be ramped up on lawmakers and business leaders to take action. Addressing climate change carries a high economic cost, but the cost of not taking immediate action is catastrophic.
There are significant economic costs in the fight against climate change as the global economy requires restructuring to mitigate carbon emissions and transition to clean energy. Over $1 trillion of current investment by the oil and gas industry will no longer be viable in a low-carbon world (John, 2021). At least $100 trillion is required over the next three decades to achieve a global clean energy future, but the issue goes beyond the cost of investment (Wolf, 2021). Redistributing income to those who will lose from the switch to clean energy is another costly challenge. The economies of many developing countries rely on fossil fuel production and need more energy to grow. Therefore, if the world makes the necessary transition to clean energy, compensating those whose livelihood and economic development now depend on fossil fuel production is a necessity. Mitigating climate change would not only improve human health but also prevent economic losses, with many of the benefits still being realized even if only the US reduced emissions (Candanosa, 2021). Moreover, countering the status quo bias that doing nothing is costless and that taking action will harm economic growth, addressing climate change and boosting economic growth are not mutually exclusive: both can be achieved (Khan et al., 2020; Taking Action on Climate Change Will Boost Economic Growth - OECD, 2017). The counterfactual is that there will be severe consequences, humanitarian and economic, if the world fails to make the necessary changes.
Set against this challenging agenda, global policies are falling short. Based on current policies and actions, the world is on course to hit 2.7°C above pre-industrial levels (Wolf, 2021). This level of warming will see worse health outcomes and increased severe weather events and drought, leading to unprecedented refugee crises and violent conflict over resources. Several nations are at risk of completely disappearing, such as the Maldives, Samoa, and the Solomon Islands. Lost farming income, lower outdoor labor productivity, rising food prices, increased disease, and economic losses from extreme weather will drive up to 132 million more people into extreme poverty by 2030 (John, 2021). As a result of these factors, various economic models show that unchecked warming could take at least 7 to 18 percent off world output by 2100 (John, 2021). Most of these effects will be felt the strongest in developing countries due to their tendency to lie in tropical and low-lying regions as well as their reduced capacity to respond to the resulting damages. Many African and Southeastern Asian countries are the most vulnerable and least prepared in the world to improve resilience: experts project total output losses of over 15 percent for these countries, including 20 percent for the African Sahel countries (ND-GAIN Country Index, 2021; John, 2021). These consequences of inadequate action beg the question of what needs to be done to avoid or mitigate these adverse outcomes.
First, fossil fuel subsidies must end. Approximately $5 trillion a year goes toward these subsidies (John, 2021). Achieving this goal is difficult due to the number of developing countries with high proportions of national wealth based on fossil fuels and limited ability to diversify their economies (Cust et al., 2017). The existence of state-owned oil companies, such as in Ecuador, Iran, and Indonesia, also complicates affairs (Cust et al., 2017). Second, the private sector must play a major role in providing the enormous investment requirements, from driving clean energy innovations to funding mitigation, which is especially important for developing countries other than China (Wolf, 2021). Third, governments can provide the right signals to shift to renewable energy sources through regulations, such as emissions limits, and incentives, such as increased carbon pricing. On the latter, there is a “growing consensus” that carbon pricing, which charges for the carbon content of fossil fuels by internalizing its costs, is the “single most effective mitigation instrument” to achieve well below 2°C (Lagarde & Gaspar, 2019). However, carbon tax or permit schemes only cover 20 percent of global carbon emissions and, at an average of $3 a tonne, carbon is priced far below the IMF recommendation of $75 a tonne in order to keep warming below 2°C; many economists recommend $100 a tonne (John, 2021).
How can these solutions be politically feasible? This question is particularly important for the world’s largest emitters including in China and India as well as in the US, where crucial swing states rely on fossil fuel production and industry lobbyists have undue influence over lawmakers. Researchers measuring the effect of climate change policies on popular support for governments in 31 countries found that in order to establish popular support for mitigation, adopting stricter environmental policies while oil prices are low, providing social insurance to those negatively impacted by mitigation, and prioritizing non-market based regulations over market-based emissions pricing can help (Furceri et al., 2021). Popular policies with clear benefits and less visible costs, such as the Green New Deal’s investments in green jobs and infrastructure, should be pursued (Columbia Center on Sustainable Investment, 2019). Although it remains possible for concentrated interests to block these changes, creating public support for these policies still makes their passage more likely. Lawmakers and business leaders worldwide need to be brave and use every tool at their disposal if humanity is to reduce the risk of societal collapse and have a prosperous future on this planet.
Edited by: Matthew Takavarasha
Works Cited
Candanosa, R. M. (2021, November 17). Reducing Emissions to Mitigate Climate Change Could Yield Dramatic Health Benefits by 2030. NASA. http://www.nasa.gov/feature/esnt/2021/reducing-emissions-to-mitigate-climate-change-could-yield-dramatic-health-benefits-by-2030
Columbia Center on Sustainable Investment. (2019, February 26). To Fight Climate Change, Think Politics First and Often. State of the Planet. https://news.climate.columbia.edu/2019/02/26/fight-climate-change-politics-first/
Countries at risk of disappearing due to climate change. (n.d.). Sustainability for All. Retrieved November 30, 2021, from https://www.activesustainability.com/climate-change/countries-risk-disappearing-climate-change/
Cust, J., Manley, D., & Cecchinato, G. (2017, March). Unburnable Wealth of Nations. International Monetary Fund. https://www.imf.org/external/pubs/ft/fandd/2017/03/cust.htm
Furceri, D., Ganslmeier, M., & Ostry, J. D. (2021, September 7). Design of climate change policies needs to internalise political realities. VoxEU.Org. https://voxeu.org/article/design-climate-change-policies-needs-internalise-political-realities
John, M. (2021, November 5). Explainer: Climate change: what are the economic stakes? Reuters. https://www.reuters.com/business/cop/climate-change-what-are-economic-stakes-2021-10-25/
Khan, S. A. R., Zhang, Y., Kumar, A., Zavadskas, E., & Streimikiene, D. (2020). Measuring the impact of renewable energy, public health expenditure, logistics, and environmental performance on sustainable economic growth. Sustainable Development, 28(4), 833–843. https://doi.org/10.1002/sd.2034
Lagarde, C., & Gaspar, V. (2019, May 3). Getting Real on Meeting Paris Climate Change Commitments. IMF Blog. https://blogs.imf.org/2019/05/03/getting-real-on-meeting-paris-climate-change-commitments/
ND-GAIN Country Index. (2021, July). https://gain-new.crc.nd.edu/
Summary for Policymakers of IPCC Special Report on Global Warming of 1.5°C approved by governments. (2018, October 8). IPCC. https://www.ipcc.ch/2018/10/08/summary-for-policymakers-of-ipcc-special-report-on-global-warming-of-1-5c-approved-by-governments/
Taking action on climate change will boost economic growth—OECD. (2017, May 23). OECD. https://www.oecd.org/environment/taking-action-on-climate-change-will-boost-economic-growth.htm
What Came Out of COP26? (2021, November 17). S&P Global. https://www.spglobal.com/esg/insights/what-came-out-of-cop26
Wolf, M. (2021, November 23). Dancing on the edge of climate disaster. Financial Times. https://www.ft.com/content/6e2b366f-e139-4d69-bd4f-9254333bf316
